Increase profitability: grow revenue and improve margins

Published Wednesday 15 April 2026

Table of contents

• What is profitability?
• Why increasing profitability matters
• Profitability factors
• How to increase gross profit
• How to increase net profit
• Increasing revenue to increase profits
• Decreasing costs to increase profits
• Common mistakes to avoid when increasing profitability
• How to make a business more profitable
• FAQs on increasing profitability

Key takeaways

• Calculate your true costs accurately by including every expense involved in delivering your work, then add contingency buffers and use change orders to address scope creep that can erode your profit margins.
• Review and negotiate supplier contracts regularly to reduce direct costs, while also comparing payment providers and factoring transaction fees into your pricing to protect margins.
• Measure your marketing return on investment by calculating customer acquisition costs and comparing channel performance to ensure your spending delivers actual results rather than draining profits.
• Balance revenue growth with cost management by focusing on both increasing sales and reducing unnecessary expenses, while avoiding cuts that could damage quality or customer experience.

What is profitability?

Profitability is the measure of how much money your business keeps after paying all expenses. Unlike revenue, which only tracks money coming in, profitability accounts for every cost involved in running your business.

A business can have high revenue but low profitability if expenses eat into earnings. That's why focusing on profit, not just sales, gives you a clearer picture of your financial health. Since small and medium-sized enterprises (SMEs) represent 90% of the world's businesses, mastering profitability is crucial for the global economy.

There are two main types of profit to track:

• Gross profit: the money left after paying direct costs tied to your products or services
• Net profit: the money left after paying all business costs, including indirect expenses and taxes

Understanding these metrics helps you identify where your business makes money and where it loses it.

Why increasing profitability matters

Higher profitability gives you more control over your business and its future. When you keep more of what you earn, you reduce financial stress and create room to grow.

Strong profitability helps you:

• Build financial security: create a buffer for slow periods or unexpected expenses
• Invest in growth: fund new equipment, staff, or marketing without taking on debt
• Make confident decisions: know you have the margins to support new opportunities
• Improve cash flow: profitable businesses typically have healthier cash positions
• Increase business value: higher profits make your business more attractive to buyers or investors

Focusing on profitability, rather than just revenue, ensures your business is sustainable for the long term.

Profitability factors

The main factors that drive profitability are your revenue, your costs, and the margin between them.

• Revenue: the total money coming into your business from sales
• Costs: the expenses you pay to run your business and deliver products or services
• Gross profit: the money left after paying direct costs tied to your goods or services (known as cost of goods sold)
• Net profit: the money left after paying all business costs, including taxes

How to increase gross profit

Gross profit is the money left after paying the direct costs of producing your goods or services. You can increase gross profit by raising revenue, lowering direct costs, or both. The key is to widen your gross profit margin, which is the gap between what you earn and what you spend on production.

Common ways to improve gross profit margins

Here are practical strategies to widen your gross profit margins and keep more of what you earn.

Nail your estimating, quoting, and pricing

Accurate pricing is the foundation of profitability. If you don't cover your true costs, you can't generate a profit.

• Calculate true costs: count every expense involved in delivering your work
• Review past projects: compare budgeted costs against actual costs to spot mistakes
• Add contingencies: include a percentage buffer for unexpected expenses or estimating errors
• Improve over time: use each project as a learning opportunity to refine your estimates

Keep an eye on scope creep

Clients often request extra work once a project starts, or you end up doing tasks they originally agreed to handle. These additions eat into your margins if you don't address them.

Use change orders to recover additional costs. A change order is an on-the-spot quote for extra work requested during a project. Issue it while the project is active rather than surprising the client with a larger bill at the end.

Review your inventory costs

Regularly check that you're getting the best value from your suppliers.

• Compare suppliers: shop around periodically to find better pricing
• Negotiate bulk deals: ask about discounts for larger orders
• Renegotiate existing contracts: your current suppliers may offer better terms to keep your business

Monitor third-party service costs

If you rely on contractors or other businesses to deliver part of your work, track their costs closely.

• Review invoices regularly: catch price increases before they erode your margins
• Build reviews into your schedule: check contractor costs quarterly or when renewing contracts
• Adjust your pricing: factor any cost increases into your own quotes and pricing

Balance payroll and productivity

Payroll is a major expense for most small businesses, so manage it carefully.

• Remove low-value tasks: keep your team focused on work that matches their skills
• Use better systems: invest in tools or software that reduce manual, repetitive work
• Manage workflows proactively: avoid relying heavily on casual staff, contractors, or overtime, which add extra costs and increase burnout risk

Design the most efficient workflow you can

Inefficient processes waste time and money. Many business practices develop without much planning, leading to bottlenecks and duplication.

Walk through your workflows and look for:

• Unnecessary steps: tasks that add no value to the final output
• Double handling: work that gets done more than once
• Waiting time: delays caused by poor sequencing or missing information
• Wasted resources: materials, energy, or effort that don't contribute to results

Properly account for shipping

Freight costs can catch out businesses that sell online. If courier fees weren't part of your original pricing, they may be eating into your margins.

• Calculate true delivery costs: include packaging, handling, and carrier fees
• Adjust your pricing: build shipping costs into your product prices or charge separately
• Review regularly: carrier rates change, so check your shipping costs periodically

Merchant service fees

Payment processing costs can reduce your margins if you don't factor them into your pricing. Transaction fees for accepting online payments typically range from 2% to 4% of each sale. These costs can significantly reduce your margins if you don't account for them.

• Factor fees into pricing: include transaction costs when setting your prices
• Compare payment providers: some offer lower rates for certain transaction volumes
• Review your payment mix: different payment methods carry different fees

How to increase net profit

Net profit is the money left after paying all business costs, including indirect expenses like rent, marketing, and administration. Improving gross profit helps your net profit, but to widen your net profit margin further, focus on reducing indirect costs.

Indirect costs include everything not directly tied to producing your goods or services, such as:

• Rent and utilities: your physical workspace costs
• Marketing and sales: expenses to attract and convert customers
• Administration: office supplies, software subscriptions, and general overhead

Common ways to improve net profit margins

Focus on these areas to reduce your indirect costs and boost your bottom line.

Measure and manage your sales and marketing

Marketing is a major expense for many small businesses. With the global revenue management market expected to reach $22 billion by the end of 2024, companies are prioritising tools to ensure their spending delivers actual results.

• Calculate customer acquisition cost: work out what it costs to gain each new customer
• Compare channel performance: identify which strategies deliver the best return on investment
• Scrutinise big-budget tactics: larger investments require clearer proof of results
• Activate free channels: word of mouth and referrals cost nothing but can drive significant growth

Reassess travel, entertainment, and discretionary spending

Habitual spending can drain profits without delivering value. Review your discretionary expenses through the lens of return on investment.

• Question recurring costs: attending the same event every year may not justify the expense
• Cut legacy spending: eliminate costs that continue out of habit rather than necessity
• Prioritise high-ROI activities: focus discretionary budget on activities with measurable returns

Restructure your lending

Interest payments reduce your profits, especially when rates rise or you rely on short-term finance to cover cash gaps.

• Review your debt structure: ask an accountant or bookkeeper to assess your current loans
• Consolidate where possible: combining loans can lower your overall interest rate
• Find expert help: look for a financial adviser in Xero's adviser directory

Be resourceful with rent and utilities

Rent and utilities can surprise businesses moving from home-based operations to dedicated premises. A rented space costs significantly more than working from your garage or kitchen table.

• Shared office spaces: split costs with other businesses
• Pop-up shops: test locations without long-term commitments
• Remote working: reduce the space you need by supporting flexible work
• Energy efficiency: cut utility costs by using space and energy wisely

Manage payroll costs

Payroll can be an indirect cost (relevant to net profit) or direct cost (relevant to gross profit). This guide deals with it under How to increase gross profit.

Strive for supply chain efficiencies

Freight and warehousing costs add up, especially if you manage a distributed supply chain or hold significant inventory.

• Consider local suppliers: shorter distances can reduce freight costs
• Tighten inventory management: hold less stock to reduce warehousing expenses
• Understand your logistics costs: track what you spend and factor it into your pricing

Pick your professional services wisely

Fees for legal, accounting, and recruitment services add up quickly. While these are often essential, you can still find better value.

• Shop around: compare providers to find the right fit for your budget
• Choose specialists: advisers focused on your industry or business size often deliver more relevant, cost-effective support
• Ask about pricing models: flat fees can be easier to budget than hourly billing

Get into tax planning

How you structure payments, schedule spending, and manage your accounts can significantly affect your tax bill. Proactive planning helps you keep more of what you earn.

• Involve your accountant early: tax planning works best at the start of the financial year, not the end
• Review your structure: payment timing and expense scheduling can reduce your tax liability
• Find expert help: look for an accountant in Xero's advisor directory

Increasing revenue to increase profits

Growing revenue is one of the most common ways to increase profits. When you sell more while keeping your margins steady, your total profit grows. Economies of scale can even widen your margins as you expand.

However, revenue growth requires investment. You may need to spend on supplies, marketing, tools, and staff. Make sure you can fund these costs and that the investment pays off over time.

You can drive revenue in five main ways:

• Increase purchase frequency: encourage existing customers to buy more often
• Acquire new customers: expand your customer base through marketing and outreach
• Expand your offerings: add new products or services to your range. For example, one consultancy used financial data to find opportunities and succeeded in growing their product offerings from a single service to nine different revenue lines.
• Upsell: offer higher-value options or add-ons to existing purchases
• Raise prices: adjust pricing to reflect the value you provide

Get more on these five strategies in our guide How to increase revenue.

Decreasing costs to increase profits

Reducing costs keeps more money in your business, which directly increases profit. This approach often carries less financial risk than revenue growth because you're cutting expenses rather than investing in new initiatives.

However, cost-cutting requires balance. Spending too aggressively can hurt your ability to deliver quality products or services. The goal is to trim expenses without slowing operations or compromising what you offer customers.

Common mistakes to avoid when increasing profitability

Improving profitability requires balance. Well-intentioned changes can backfire if you cut the wrong costs or push too hard in the wrong direction.

Watch out for these common mistakes:

• Cutting costs that drive revenue: reducing marketing, staff, or quality can hurt sales more than it saves
• Ignoring cash flow: a profitable business can still fail if cash doesn't arrive when you need it
• Racing to the bottom on price: competing only on price erodes margins and attracts price-sensitive customers
• Focusing only on cost-cutting: sustainable profitability usually requires a mix of revenue growth and expense management
• Not tracking results: without measurement, you won't know which changes actually improve your margins. Many financial teams constantly track results, with 36% of CFOs reporting their teams alter their forecasts at least weekly.
• Making changes without input: your team often knows where inefficiencies hide and can help identify smarter solutions
• Neglecting customer experience: cutting corners that affect quality can damage your reputation and long-term sales

Review your profitability strategy regularly and adjust based on what the numbers tell you.

How to make a business more profitable

Understanding how to increase profits gives you less financial stress and more confidence to invest in growth. With clear visibility into your margins, you can make better decisions and spot opportunities faster.

Getting advice from experts, mentors, or industry peers can help. Set clear profitability goals, monitor your progress, and build a strategy that delivers lasting results.

Xero accounting software helps you track profitability in real time. With Xero, you can pull together the numbers you need, automate routine tasks, and get insights that highlight where to improve margins.

Get one month of Xero free and take control of your business profitability.

FAQs on increasing profitability

Here are answers to common questions about improving your business profitability.

What does increasing profitability mean?

Increasing profitability means growing the amount of money your business keeps after paying all expenses. This differs from increasing revenue, which focuses only on sales without accounting for costs.

Should I focus on increasing revenue or reducing costs?

Both approaches can improve profitability. Start by reviewing your margins to see where you have the most room for improvement. Many businesses benefit from a combination of modest revenue growth and targeted cost reductions.

What's a good profit margin for a small business?

Profit margins vary widely by industry. While the average net profit margin across all industries is about 8.5%, specific sectors differ greatly. For example, service businesses often achieve 15–20% net margins, while retail typically runs 2–5%. Compare your margins to industry benchmarks and focus on steady improvement over time.

How long does it take to see profitability improvements?

Some changes, like renegotiating supplier contracts or cutting unnecessary expenses, can show results within weeks. Others, like raising prices or improving operational efficiency, may take several months to fully impact your bottom line.

How can accounting software help increase profitability?

Accounting software gives you real-time visibility into your revenue, costs, and margins. With accurate data at your fingertips, you can spot problems early, track the impact of changes, and make informed decisions about where to focus your efforts.